Slump Taught Profligate Americans Value of Saving: Economy

Americans are likely to keep
rebuilding their savings for years to come as the specter of job
losses and the meltdown in stocks triggered by the recession
lingers, economists say.

Households are putting money away at a pace more than
double that leading up to the economic slump. The saving rate
has averaged 4.8 percent since June 2009, when the 18-month
contraction ended, compared with 2.2 percent in the three years
leading up the downturn.

“Households are going to be mired in this deleveraging
environment for a few more years,” Ellen Zentner, a senior U.S.
economist at Nomura Securities International Inc. in New York,
said in a telephone interview. “That’s not atypical following a
financial crisis.”

The need to boost cash reserves and pay down debt may
eclipse the urge to be the first on the block to drive the
newest model car, stemming a recent decrease in the saving rate.
Almost three years into the recovery, the economy has yet to
regain even half the 8.8 million jobs lost or the $16.4 trillion
in household net worth washed away as a result of the recession,
indicating consumers will want to keep a bigger cash cushion.

“A savings rate in the neighborhood of 5 percent is one
that would allow consumers to prepare for long-term obligations
and yet will support the economy in the short-term,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott
LLC in Philadelphia.

Pent-Up Demand

Pent-up demand for automobiles helped propel a 0.8 percent
gain in consumer spending in February, the biggest in seven
months, according to Commerce Department data. The pickup
carried over into March as figures this week showed retail sales
also advanced 0.8 percent, reflecting stepped-up purchases of
furniture, clothes and electronics.

Stronger earnings, reflecting in part the recent pickup in
sales, are boosting share prices. The Standard & Poor’s 500
Index climbed 0.1 percent to 1,378.53 at the 4 p.m. close in New
York. General Electric Co. (GE), Microsoft Corp. (MSFT) and Schlumberger
Ltd. reported profits that topped analysts’ estimates.

Shares also rose on better economic news elsewhere. A
report today showed German business confidence unexpectedly
increased in April for a sixth month.

Recent Drop

The increase in U.S. consumer spending pushed the saving
rate down to 3.7 percent in February, the lowest in more than
two years and matching the level in August 2009 as the weakest
of the current expansion, Commerce Department data show.

Such profligacy will probably not go unchecked, according
to analysts like LeBas. The ups and downs of the job market
underscore the need to keep saving, he said.

“If the labor markets are volatile, you have a higher
chance of losing your job and, therefore, as an individual you
need to save more,” he said.

Last month was a case in point. Employers added 120,000
workers to payrolls, less than the lowest estimate of economists
surveyed by Bloomberg News and the poorest showing in five
months, Labor Department figures showed. The jobless rate
dropped to a three-year low of 8.2 percent as some of the
unemployed stopped looking for work.

Andrew Hedberg, a Minneapolis resident who’s been without a
job since losing a seasonal position at Macy’s Inc. about a year
ago, is among those knowing first-hand the importance of having
money stowed away.

Insurance Policy

“I’ve had to dip into my savings,” said Hedberg, 38.
“I’m certainly glad that I had savings available to me because
not everyone does. It bolsters my belief that savings is the
best investment, like an insurance policy that I can make for
myself.”

By keeping borrowing costs low to spur spending and growth,
Federal Reserve policy makers have had a hand in the recent
decrease in the rate at which nest eggs are rebuilt, said LeBas.
Near-zero interest rates on savings accounts reduce the
opportunity cost of putting that cash to work, he said.

“The Federal Reserve, with its low-rate policy, has been
subsidizing consumers’ ability to spend by reducing the desire
to save,” said LeBas. The central bank “has actually been more
effective than most people recognize in that they’ve really
convinced consumers to spend rather than save, thereby
supporting short-term economic activity,” he said.

Fed’s Influence

Fed policy makers have kept their benchmark rate near zero
since December 2008. Central bank officials have said they plan
to keep interest rates low through late 2014.

The recent decline in the saving rate, the share of after-tax income that Americans are able to sock away, including
individual retirement accounts and 401(k)s, may also be a
statistical mirage that will eventually be revised away,
according to economists like Stuart Hoffman. That indicates
spending may not decelerate.

Revisions to gross domestic product figures on Feb. 29
showed wages and salaries from July through September rose
$107.2 billion, up from the $24.8 billion gain initially
reported. Updates issued last month showed they climbed another
$89.1 billion in the fourth quarter, up from an initial estimate
of $66.1 billion.

Baby-Boom Bias

Additionally, while initial contributions to IRAs and
401(k)s are included in savings, the capital gains from those
funds are not. That means the rate will probably be held down
over the next decade as the Baby Boom generation retires and
starts spending those proceeds.

Other economists, such as Ken Mayland, believe the current
pace of household spending is unsustainable.

“Consumers have been working down their personal savings
rate to sustain a spending style,” Mayland, president of
ClearView Economics LLC in Pepper Pike, Ohio, said in a
telephone interview. “That can only go on so long.”